Two changes in the federal tax law enacted on July 4, 2025 (Public Law 119-21) mean fewer information returns for many small businesses, landlords, freelancers and online sellers. If you pay contractors, or if you receive payments through apps and online marketplaces, here is what changes for 2026, and what does not.
For businesses that pay contractors: $600 becomes $2,000
For decades, a business had to file Form 1099-NEC (for nonemployee compensation) or Form 1099-MISC (for items such as rent) when it paid someone $600 or more during the year. For payments made after December 31, 2025, that general threshold rises to $2,000. The IRS instructions note that the amount may be adjusted for inflation beginning in 2027.
- What this means for 2026 payments: if you pay an unincorporated contractor, such as a sole-proprietor bookkeeper or handyman, $1,500 for work during 2026, you generally will not be required to issue a Form 1099-NEC for it. At $2,000 or more, you will.
- Some thresholds are different. Not every box moved. For example, the instructions still call for reporting royalties of $10 or more and gross proceeds of $600 or more paid to an attorney. Check the current instructions for each type of payment.
- Backup withholding follows the new threshold for federal purposes. If a payee will not give you a taxpayer identification number, the federal backup withholding rules now apply once payments reach the $2,000 reporting threshold.
- Your 2025 forms were unchanged. The $600 threshold still applied to payments made during 2025.
Even with fewer forms required, it is still good practice to collect a Form W-9 from every contractor before you pay them. It is much harder to get one in January.
For people paid through apps and marketplaces: the 1099-K threshold
Payment apps and online marketplaces (third-party settlement organizations) file Form 1099-K to report payments for goods and services. Under a 2021 law, the reporting threshold was scheduled to fall to $600, and the IRS had been phasing that in. The 2025 law reversed this retroactively. Now, a platform is required to file Form 1099-K only when your payments for the year total more than $20,000 and more than 200 transactions.
Some points to keep in mind:
- You may still receive a 1099-K below the threshold. Some platforms send them anyway.
- Card payments are different. When you accept credit or debit cards directly through a payment processor, the processor files a Form 1099-K regardless of the number or amount of payments.
- Personal payments are generally not income. According to the IRS, money from friends and family as a gift, or to repay a shared personal expense, is not taxable and should not be reported on a 1099-K. If you receive a 1099-K that includes personal payments, keep records to show what they were.
What does not change: all income is taxable
Higher reporting thresholds change which forms are filed (and, federally, when backup withholding applies). They do not change what is taxable. The IRS is clear that taxpayers must report all income on their tax returns, whether or not they receive a Form 1099-K or any other information return. A freelancer paid $1,800 by a client, with no 1099-NEC, still must report that $1,800. Online sellers still need records of what they paid for items they sell, both to figure profit and, for personal items sold for less than they cost, to show there was no taxable gain.
For people with side income, fewer forms means your own records matter more. Keep a simple log of income by source, and save receipts for business expenses. If you expect to owe tax on side income, make quarterly estimated payments to avoid penalties.
California
California does not adopt the federal backup withholding changes. According to the Franchise Tax Board’s summary of the federal law (last updated October 2026), California does not conform to the exclusion from backup withholding for payments under $2,000, so the $600 threshold continues to apply for California backup withholding on these payments. California also does not conform to the exclusion for third-party network transactions of $20,000 or less and 200 transactions or fewer for California backup withholding. California may require copies of federal information returns, and those copies reflect the federal changes. California income tax, like federal tax, applies to all of your income regardless of whether a form is issued.
Steps to take now
- Payers: update your vendor records and accounting software for the new $2,000 threshold, and keep collecting W-9s.
- Payees and sellers: separate personal and business transactions on payment apps, and keep your own income records.
- Everyone with side income: check whether you need to make a fourth-quarter estimated payment, due January 15, 2027, for 2026 income.
Sources
- IRS: Instructions for Forms 1099-MISC and 1099-NEC (What’s New: $2,000 threshold)
- IRS Fact Sheet FS-2026-07: The Working Families Tax Cuts – What gig economy workers should know
- IRS: Understanding your Form 1099-K
- IRS: Working Families Tax Cuts – Businesses (third-party network transactions)
- IRS: Estimated taxes
- Congress.gov: Text of H.R. 1 (Public Law 119-21), sections 70432 and 70433
- California Franchise Tax Board: Summary of Federal Income Tax Changes
If you would like help setting up your contractor records or sorting out a Form 1099-K, please contact the office or call us at (858) 549-1295.
This article provides general information as of October 2026 and is not tax advice for your specific situation. Tax rules change, and the right answer depends on your facts.